Photo: Jeff Ferzoco / Flickr
A recent Freakonomics post raises issues about the state of small business lending these days.An entrepreneur, who we’ll simply call H., wrote in about how he tried to secure a $50,000 loan by offering the same amount as collateral. The bank refused to oblige, insisting the terms of the loan included a “more favourable approval amount of $25,000,” among other conditions. Was this a sign of the times or was the bank just behaving irrationally? Had H. done something wrong?
He fired off this email in response:
“This is the most guaranteed loan (the safest bet) that BANK_NAME will ever make in its history. BANK_NAME is essentially taking zero risk. He/she should be more than happy to approve a loan similar to this in the sum of trillions. BANK_NAME is guaranteed to see the return. … the money will be sitting in your vault.”
“This is a real head-scratcher,” said Charley Moore, founder and chairman of RocketLawyer.com, a legal service. “But it’s a good thing that Stephen J. Dubner says up front we’ll just ‘assume the story is at least 60 per cent true.'” Because there may be a lot H. didn’t tell us.
“Perhaps there is a past bankruptcy involving one or both of the business partners, an outstanding lien or judgment,” Moore said. “These issues should have been disclosed for us to get a clearer picture of what the bank knows that we may not about this potential creditor’s risk.”
If this was the case, H.’s first mistake was not researching whether his business was eligible for a loan, backed by the government. Moore said the loan was “relatively small for a business,” especially one so closely held, so H.’s first mistake was not turning to the U.S. Small Business Association (SBA) as a loan guarantor.
Securing a small business loan is no easy feat nowadays, with lenders all-too reluctant to cut unknown borrowers a check. With this in mind, “you need to be able to present a guarantee to your banker that this is an investment worth considering, which you can with a few additional articles of collateral,” Moore said.
Here, he explains what to bring to your sit-down:
- An updated business plan explaining your businesses’ goals and objectives, projected earnings (including financial statements and pro formas), marketing strategy, and any other relevant info. “Banks appreciate everything to be highly detailed and spelled-out, so don’t be afraid to include something like a bio of the company’s partners, advantages your company has over others, etc.,” Moore said.
- Financial support for your loan application. “This means getting together financial data (credit history) that proves to your lenders that are a good credit risk,” said Moore. Your credit history includes: Personal financial statements with your assets and liabilities Credit cards with their current balance All outstanding loans (including current monthly payments, original balances, and outstanding amounts) Monthly mortgage or rent payments Net monthly income, account balances (savings and checking) The current value of your car (original cost, balance owed, and monthly payments) The current value of all owned property (including stocks and bonds)
- Personal financial statements with your assets and liabilities
- Credit cards with their current balance
- All outstanding loans (including current monthly payments, original balances, and outstanding amounts)
- Monthly mortgage or rent payments
- Net monthly income, account balances (savings and checking)
- The current value of your car (original cost, balance owed, and monthly payments)
- The current value of all owned property (including stocks and bonds)
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